U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20085 / April 23, 2007 SEC CHARGES HUSBAND OF AMGEN VICE PRESIDENT WITH INSIDER TRADING SECURITIES AND EXCHANGE COMMISSION v. GARY K. MELTON, Civil Action No. CV 07-2655 GHK (JCx) (C.D. Cal.) The Securities and Exchange Commission today announced the filing of securities fraud charges against the husband of an Amgen vice president for engaging in insider trading in the stock of Abgenix, Inc., a biopharmaceutical company that was acquired by Amgen in April 2006.
The Commission’s complaint, filed on April 23 in federal district court in Los Angeles, alleges that Gary K. Melton, age 54, of Newbury Park, Calif., misappropriated confidential information from his wife, Amgen’s vice president of strategic sourcing and procurement, regarding Abgenix when he purchased Abgenix stock days before Amgen’s acquisition of Abgenix was publicly announced. Melton realized illegal profits of $15,252 from his trades and agreed to pay approximately $31,000 to settle the charges.
The Commission’s complaint alleges that in early November 2005, Melton and his wife discussed the publicly announced favorable results of a clinical trial for an antibody jointly developed by Amgen and Abgenix. At the time, Melton commented to his wife that he might purchase some Abgenix stock, to which his wife said nothing. Melton’s wife reported directly to Amgen’s chief financial officer and attended meetings where mergers and acquisitions were discussed.
A month later, according to the complaint, Melton’s wife learned through her employment at Amgen that a public announcement of Amgen’s acquisition of Abgenix was imminent. Recalling her earlier conversation with her husband, Melton’s wife instructed him not to purchase Abgenix stock, the complaint alleges. The complaint further alleges that Melton understood his wife’s unexplained instruction to mean that more favorable news about Abgenix was forthcoming, and that Melton knew, or was reckless in not knowing, that his wife’s instruction not to purchase Abgenix stock was based on material nonpublic information she had acquired through her employment at Amgen and that he could not lawfully use such information for his personal benefit.
According to the complaint, despite his wife’s admonition, Melton nevertheless purchased 2,050 shares of Abgenix stock between December 8 and 13, 2005. After the market closed on December 14, 2005, Amgen and Abgenix issued a joint press release announcing Amgen’s acquisition of Abgenix for $22.50 per share, which represented a 54% premium on the closing price of Abgenix stock that day. On December 15, 2005, Melton liquidated his Abgenix stock and realized an illegal profit of $15,252. The complaint alleges that by engaging in such trading, Melton misappropriated material nonpublic information from his wife in breach of his duty of trust and confidence to her.
To settle the Commission’s charges, Melton consented, without admitting or denying the allegations in the complaint, to a final judgment permanently enjoining him from future violations of the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and ordering him to pay $15,252 in disgorgement of his illegal trading profits, plus prejudgment interest, and a civil penalty in an amount equal to his trading profits.
U.S. SECURITIES AND EXCHANGE COMMISSION Litigation Release No. 20084 / April 23, 2007 Accounting and Auditing Enforcement Release No. 2599 / April 23, 2007 Securities and Exchange Commission v. Richard M. Scrushy, Civil Action No. 03-J 0615 S (N.D. Ala.) (Judge Inge P. Johnson). Healthsouth Founder Settles SEC Fraud Action for $81 Million The Securities and Exchange Commission announced today that the United States District Court for the Northern District of Alabama has entered a Final Judgment against defendant Richard M. Scrushy that permanently bars Scrushy from serving as an officer or director of a public company, permanently enjoins Scrushy from committing future violations of the antifraud and other provisions of the federal securities laws, and requires Scrushy to pay $81 million in disgorgement and civil penalties.
The Commission's complaint in this action charges Scrushy with directing a $2.6 billion financial fraud at the HealthSouth Corporation during the years 1996 through 2002. Scrushy was one of HealthSouth's founders, and was chairman of its Board of Directors and its chief executive officer during the relevant period of the fraud.
The Complaint alleges that, at Scrushy's direction, HealthSouth's overstated its revenue by more than $2.6 billion from the second quarter of 1996 through the third quarter of 2002. This overstatement led directly to quarterly and annual overstatements of net income and retained earnings. The Commission's complaint charges that, by the end of 2002, HealthSouth was claiming to have over $1.5 billion in accumulated retained earnings, when in fact the Company had operated at a significant loss over its entire corporate history. The HealthSouth fraud resulted in one of the largest accounting restatements in American corporate history.
The Final Judgment orders Scrushy to pay $81,000,000, comprised of $3,500,000 in civil penalties and $77,500,000 in disgorgement, with the disgorgement amount subject to an offset for any amounts paid in judgments or settlements in certain derivative, corporate, and class action lawsuits seeking recovery of the same money as the Commission. The Final Judgment provides that, upon a motion to the Court, the civil penalties paid by Scrushy may be distributed pursuant to the Fair Fund provisions of Section 308(a) of the Sarbanes-Oxley Act of 2002, in this case by asking the Court to add these sums to the Fair Fund already established as a result of the Company's settlement. The Final Judgment permanently prohibits Scrushy from acting as an officer or director of a public company, and Scrushy has consented to refrain from seeking modification or removal of this prohibition for at least five years from the entry of the Final Judgment. The Final Judgment permanently restrains and enjoins Scrushy from violating or aiding and abetting violations of Section 17(a) of the Securities Act of 1933 and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 10b-5, 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder.
Scrushy consented to the entry of the Final Judgment without admitting or denying any of the allegations in the Commission's complaint. In his Consent to this settlement, which is incorporated into the Final Judgment, Scrushy has agreed to refrain from seeking indemnification or reimbursement from any third-party for any part of the $81 million required by the Final Judgment, whether that sum is paid directly to the Commission or paid to satisfy judgments or settlements in the lawsuits for which Scrushy claims an offset against the $77.5 million disgorgement amount.
The Commission has previously settled related actions with respect to HealthSouth [Release No. LR 19280] (June 23, 2005); Emery Harris [Release No. LR 18700] (May 10, 2004); Kenneth Livesay [Release No. LR 18843] (August 23, 2004); Michael Martin and Malcolm McVay [Release No. LR 18904] (September 28, 2004); Kay Morgan [Release No. LR 18941] October 23, 2004; Angela Ayers and Virginia Valentine [Release No. LR 19123] (March 7, 2005); Kathy Edwards [Release No. LR 19322] (August 2, 2005); William Owens [Release No. LR-19743] (June 28, 2006); and Weston Smith [Release No. LR 19766] (July 20, 2006).
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